Note 4 - Health Benefit Programs

Substantially all of our employees are covered by the U.S. government health plan, the Federal Employees Health Benefits Program (FEHBP). The Office of Personnel Management administers the program and allocates the cost of the program to the various participating government agency employers. The parent-subsidiary relationship that we have as an “independent establishment” of the executive branch of the United States government allows for this accounting treatment. We cannot direct the costs, benefits, or funding requirements of the federally-sponsored plan.

Our portion of the cost is based upon the average premium cost of the various employee coverage choices and the specific coverage choices made by our employees. Our employees paid approximately 16% of the cost in 2005, 2004, and 2003, and we paid the remainder.

Our employees who participate in the FEHBP for at least the five years immediately before their retirement may participate in the FEHBP during their retirement. The Omnibus Budget Reconciliation Act of 1990 requires us to pay the employer’s share of health insurance premiums for all employees and their survivors, who participate in the FEHBP and who retire on or after July 1, 1971. However, we do not include the costs attributable to federal civilian service before that date.

We account for retiree health benefits as a participant in a multi-employer plan arrangement in accordance with FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. Our retiree health benefit expenses amounted to $1,495 million in 2005, $1,313 million in 2004 and $1,133 million in 2003. We include these costs in our compensation and benefits expense.

Note 5 - Debt And Related Interest Cost

Under the Postal Reorganization Act, as amended by Public Law 101-227, we can issue debt obligations. However, we are limited to net annual increases of $2 billion in our debt for capital improvements and $1 billion for operating expenses. Our total debt cannot exceed $15 billion.

Cash outlays for interest, including interest on the retirement “supplemental liability,” discussed in note 7, were $263 million in 2005, $242 million in 2004, and $426 million in 2003.

In January, July, and August 2003, we repaid debt with maturity dates that extended to 2031. In connection with the August transaction, we paid a premium (debt repurchase expense) of $360 million which was expensed when incurred.

At September 30, 2005 no debt was outstanding on our balance sheet. At September 30, 2004 the market value of our debt was $1,800 million. This debt consisted of $1,800 million in cash drawn on our line of credit with the Federal Financing Bank.

Our Note Purchase Agreements with the Federal Financing Bank, renewed this year, provide for revolving credit lines of $4 billion. These credit lines enable us to draw up to $3.4 billion with two days’ notice and up to $600 million on the same busi-ness day the funds are needed. Under these agreements we can also use a series of other notes with varying provisions to draw upon with two days’ notice. The notes provide us the flex-ibility to borrow short-term or long-term, using fixed or floating rate debt, and can be either callable or non-callable.

Note 6 - Retirement Programs

Our employees, retirees, and their survivors participate in pension programs of the U.S. government. We account for our involvement in these programs as participation in a multi-employer plan arrangement, in accordance with FAS 87, Employers’ Accounting for Pensions. The parent-subsidiary relation-ship that we have as an “independent establishment” of the executive branch of the United States government allows for this accounting treatment. We cannot direct the costs, benefits, or funding requirements of the federally-sponsored plan.

With certain exceptions, employees participate in one of the following three retirement programs based upon the starting date of their employment with the Federal Government. Employee and employer contributions are made to the Civil Service Retirement System (CSRS), the Dual Civil Service Retirement System/ Social Security (Dual CSRS), or the Federal Employees Retirement System (FERS), which are administered by the Office of Personnel Management. Employees may also participate in the Thrift Savings Plan, which is a defined contribution retirement savings and investment plan. Postal Service employees are authorized to participate in the Thrift Savings Plan by the Federal Employees Retirement System Act of 1986. The Plan is administered by the Federal Retirement Thrift Investment Board.